Saving rates are low, but now is the time to act

Far too many people think “savings rates are so low, why bother doing anything?” But while rates are low, we should not be complacent.

People who are active about their finances, can save up to 6 per cent interest. So here is my rate-boosting masterclass.

The aim is to put every penny where it earns the maximum interest. Many specialist higher-rate accounts only let you pay in limited amounts for short amounts of time. So if you have big savings, you need to fill them up, then snowball on to the next best.

Don’t overly worry about safety. All UK-regulated savings have the full £85,000 per person, per financial institution savings safety protection. But that is not a reason to put money in and forget about it. Monitor rates every few months and if they drop, ditch and switch.

First, clear expensive debts

The highest guaranteed return-for-savings comes from clearing expensive debts, starting with the highest rates. If your debts cost more than your savings earn after tax, clear what you can and you are onto a winner.

This applies to mortgages too, unless you’ve early repayment penalties. With a mortgage, always have a cash emergency fund in savings before clearing it.

Earn 6 per cent AER in a regular saver, plus free £100

l The highest rate on the market is a regular savings account, but it’s only available to new or existing First Direct current account customers. Though as First Direct’s won every customer service poll I’ve ever done and currently offers £100 to switch to it, that’s still an attractive proposition.

Its 6 per cent regular saver lets you put up to £300 a month away for a year and the rate’s fixed. HSBC customers get 4 per cent AER on a similar product, while anyone can get the Leeds Building Society regular saver at 3.05 per cent AER.

Use current accounts to get 5 per cent AER easy access

I always used to say “never store cash in current accounts, as you earn nothing”. While that still holds true in the main, these days a few bank accounts offer super-high interest rates to draw you in.

The highest is Nationwide’s FlexDirect at 5 per cent AER, but you only get this rate for a year, and only on balances up to £2,500. The stand-out deal’s Santander 123’s 3 per cent AER on all savings if you’ve £3,000 to £20,000. It has a £2 per monthly fee, but pays up to 3 per cent cashback on bills. Weigh up if you’ll earn more than the fee before switching.

With both, you need to properly switch to them.

Is an ISA nicer? Up to 1.75 per cent are tax free

A cash Isa’s just a savings account where the taxman doesn’t remove 20 per cent or 40 per cent of your interest.

You can put £5,760 in each tax year, and it remains tax-free year after year until you withdraw it. It’s a no-brainer.

Don’t think you’re locking the cash away — the top easy access deal is from the Post Office at 1.8 per cent AER on £100+, with two penalty-free withdrawals allowed each tax year. This allows you to transfer old Isas into it as well to boost their rates.

The rate includes a bonus for 18 months, so it’ll almost certainly plummet after. Make a note in your diary to ditch and transfer.

Lock in for up to 2.57 per cent AER

If you’re prepared to lock cash away without access, you can earn more in a fix. Yet it’s worth noting many pundits predict UK rates will rise in 2015. So today’s best rates may not look so good if you lock in for too long.

These are the current top fixed deals for both normal savings and cash Isas. They change daily: latest rates are at mse.me/fixedsavings

Credit unions are local savings and loans co-ops. Some have deals that beat the market’s best buys, such as 3 per cent savings, 2.15 per cent AER one-year fixes and 2.5 per cent easy-access cash Isas.

They’re very localised, so whether you can get these deals depends on where you live or work.

1.5 per cent AER standard easy access savings

If you’ve any left, the final option’s a normal easy access savings account. Top payers are Tesco Bank and Icici Bank at 1.5 per cent AER, although Tesco’s account includes a bonus rate for the first year, so it’s likely to plummet afterwards.

If you have big cash, as you’re only protected up to £85,000 per institution, split it.

If you’re prepared to up the risk a little, it’s worth looking at peer-to-peer savings, which can pay up to 6 per cent. Here your money’s lent to someone who wants to borrow it, via online financial matchmakers such as Zopa, Funding Circle and RateSetter.

This can be lucrative, but it has its risks, though the sites try to mitigate them.